Crime and Subterfuge at UBS
April 25, 2008 – 11:46 amReeling from the staggering $38 billion in subprime related losses, UBS is cutting 3000 jobs and raising $14.9 billion (its second capital sale) and replacing its chairman.
Now the bank has issued a report which examines ”roots” of the problem. The bank is obviously taking painful, desperate measures it thinks will help it survive, right? Not really; the bank has committed a crime in our estimation — a see no evil fraud to the tax payer; a beat down of billions. The Swiss economy will soon be taking painful, desperate measures to replace so that it will survive. The report is what you would expect from the guilty, and the financial media are eating it up (if not abetting the subterfuge).
With everything now in place all we need to really get the ball rolling is the ‘mea culpa’ for ‘’errors’’ made last year. To that end the board members wore their shame faces to a shareholder meeting, then issued a 50-page report released purportedly to lay out in extraordinary detail the roots of the problem. The real reason again is to cover up the roots of the problem; or rather, responsibility for it.
Now watch how Fortune and The Economist tag team the spin control on this one. Together they present contradictory confusing accounts of the causes of UBS collapse, but both present the report in the light of a company painfully scrutinizing itself for reasons of its own folly. But that’s your cover up. Spin incompetence if you want boyz, but one of the surest things in life is that it was criminal negligence — not incompetence — that threatens to send UBS spiraling down to the pink sheets and the Swiss economy into recession as a result. UBS was one of the biggest banks, with designs to compete with the Goldman Sachs’ of the world, across hundreds of different products. They didn’t get there by incompetence.
According to The Economist the 400-page report broadly outlines three causes of the banks failures and solves
The mystery of how UBS (latest nickname: Used to Be Smart) got into this mess is being resolved. On April 21st the bank released a summary of an internal investigation demanded by the Swiss Federal Banking Commission into the causes of the write-downs. The investigation was conducted by 20 lawyers from UBS, and their 400-page report is now being chewed over by the regulator.
It is no mystery as to how UBS got into this mess — its insiders and CEO put it there, sacrificed it to the altar of subprime profits, well aware that they would clear by the time the sham cascaded down on everyone else. And if you think the Swiss Federal Banking Commission isn’t in on this one ask yourself why it allowed UBS’s own lawyers to prepare the report?
Now Bloomberg jumps on the cover-up wagon
“There are some damning criticisms about UBS management,” Peter Thorne, a London-based analyst at Helvea SA, said in a note. “The report will be scrutinized intensively for ammunition for those who believe that a fundamental restructuring of the UBS business model is appropriate.”
But the good ammunition was left out. As for restructuring of the UBS business model — it’s not a business model, but an old tried and true M.O.
The three broad explanations for the bank’s woes given by the report are:
- The first was the investment-banking arm’s preoccupation with growth.
- Another was the reliance of the control team on flawed measures of risk.
- A third was the culture of the bank.
(1) — Let’s look at growth and the esprit de corps Fortune and The Economist put on this one.
First Fortune points to Dillon Read Capital Management (doesn’t say anything — just points):
The document is highly illuminating for its detailed analysis of the central role played by its own so-called internal hedge fund, Dillon Read Capital Management, in the debacle.
Dillon Read Capital Management was a $4 billion fund launched in June of 2005 by former UBS investment bank chief executive John Costas, with the help of then-UBS CEO Peter Wuffli.
Then The Economist points away from Dillon Read:
Start with those growth plans. Many had assumed that Dillon Read Capital Management (DRCM), a hedge fund set up by UBS in 2005 and closed in 2007, was the primary culprit for the write-downs; in fact, it contributed only 16% of the red ink spilt up to the end of last year.
When someone finally says something of substance it is not nearly enough. According to Fortune, Dillon Read
was a veritable warren of internal contradictions. It managed client money accessed via UBS’ massive private client network, but saved millions of dollars annually by using UBS operations and support staff. DRCM also lured away top talent, draining UBS’ investment bank of over 100 of its best and most senior personnel, almost all from its fixed-income desks.
Most important, DRCM accessed the bank’s exceptionally low cost of funding…
Sweet — without coughing up capital or recruiting personnel, the hedge fund was profitable from day one. Fortune continues:
This created a system of truly perverse incentives: Since all risk was UBS’ and DRCM’s clients, and since capital was both abundant and inexpensive, the immediate impetus was to buy and position bonds that offered the greatest carry, or differential between the cost of financing and interest paid
So the push to subprime or CDOs was on and it was Dillon Read that generated the risky profits or was it? We can blame Dillon Read for this can’t we? But remember The Economist says Read led to only 16% of write downs. At this point we are confused — perhaps we’re supposed to be.
(2) — Absence of risk management
Where revenues could be boosted, they were. The CDO desk concentrated on riskier “mezzanine” CDOs, which generated higher fees but suffered heavier falls in value when markets seized up in August. Cheaper hedging strategies based on buying protection on just a tiny proportion of the bank’s “super senior” (least risky) positions tended to win out over more effective but pricier ones, such as insuring the lot. The end result: a desk that numbered just 35-40 people at its peak was responsible for write-downs of around $12 billion in 2007, two-thirds of the total.
‘35-40 people at its peak was responsible for write-downs of around $12 billion in 2007’. How did these 35-40 get so much responsibility? Well, they probability got it from way-on-high. UBS didn’t get there by incompetence. And now the old familiar M.O. shows up — a small cadre of lose cannons doing all the damage ones easy to point a finger at. Why didn’t they just pick one guy, a-la Kerviel? Save themselves the trouble of compiling a whole list.
More -risk out of control- management:
If the bank’s business leaders overlooked risk, its risk controllers miscalculated it. Confidence in the AAA ratings on CDOs explains the decision to hedge only 2-4% of many super-senior exposures. Those same reassuring ratings also led to more generous treatment of CDO exposures in the bank’s value-at-risk (VAR) calculations, a way of working out the maximum loss that it was likely to suffer. Liquidity was simply assumed, enabling assets to be placed in the bank’s trading book, where they attracted a lower capital charge.
But no one is in jail or even at risk of it. These guys didn’t get there by incompetence.
(3) — This one has been used before too, by Enron. The company culture was hostile, and too intimidating to questioning
Probing questions could and should have revealed the extent of the risks that UBS was taking. Concerns were aired at various times in 2006 and 2007. The bank’s top brass was sufficiently attuned to the deterioration in the American housing market to have raised it in September 2006. But the report says that they were fobbed off by assurances from the investment bankers that all was well. Proposals from the bank’s treasury in early 2007 to cap the level of the investment bank’s illiquid assets also came to nothing.
There is no suggestion that anything untoward was going on. Assurances that risks were being properly managed were given in good faith, says Rupert Jolley, the UBS managing director who led the investigation: “The culture of the bank was to rely upon each other’s word.” But there was also a clear incentive to set aside any doubts as long as revenues were rising.
They want you to believe that billions of losses and write downs with more on the way resulted from “the culture of the bank”. The only thing anyone got right on this was the last line, but the spin is unmistakable. “Clear incentive to look away” — we call that a bribe in other areas.
And if you still don’t believe that the financial media is owned, then you can eat this Sundae without getting sick. Fortune feigning praise for credibility says of the report:
Like a cherry on top of a demonic sundae, the UBS report baldly confronts the poor risk management that put the bank in its current fix
You mean the report that UBS wrote on themselves — by themselves?
So its just the same ‘ol see-no-evil-scam where all the guards break their necks to look the other way, and no one complains as long as the profits are in, the stock is up and the insider’s options in the money. When the whole house of cards inevitably crashes, they stick the tax payer with the recession-driving bailout bill, frown, and write a report. Doves crying, for sure.
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